Who is this man and what is he dreaming about?  He’s an engineer (not his real job) at Corning (GLW) and he is dreaming about ways in which the glass content of smartphones can be further increased.  What will put a smile on his face is a recently granted patent for what is a six sided, all glass mobile device, and to make the smile even bigger, the patent was granted to Apple (AAPL), and follows a series of other earlier Apple patents that describe similar devices.  In a true sense, the patent actually describes an all glass structure comprised of a transparent front and back, with touch controls, and four sides, with touch sensitivity for additional controls, such as speaker volume and power. 
While the entire body looks like a single piece of glass, it is actually two or more pieces joined using glass frit, a bonding material that acts as glass solder, melting at relatively low temperatures and then quickly hardening to seal the bond.  Such materials were used to join the glass parts of cathode ray tubes.  Panel producers also dream of such devices as the potential for a second display on the back and more simplified indicators on the side mean more panel content and more dollars/phone.  Of course, a patent, while an indication of potential direction, does not mean such a device is being developed, and there are still a number of issues, particularly the need for machining to create holes for microphones and speakers, but device producers have surmounted many such problems over the years in order to differentiate their products, and glass scientists continue to fabricate new materials that were not even dreamed about a few years ago. 
With ultra-thin flexible glass just beginning to have an impact and more mature hardened glass products moving from consumer electronics to the automotive space, the reality of a six-sided all glass smartphone no longer seems that far-fetched.  Samsung (005930.KS) originated mobile devices with rounded edges, which also seemed fanciful a few years back and now seem the norm, so the reality of such a truly six-sided device with multiple displays and indicators is both plausible and possible, but what will really put a smile on this man’s face is that the six-sided, all glass phone will need six sides of Gorilla Glass™ to protect it.  That’s a lot of glass.

Corning (GLW) held an opening ceremony at its Gen 10.5 glass substrate plant in Guangzhou, the company’s 3rd Gen 10.5 plant in Mainland China and Corning’s 7th glass plant in China.  There is one Gen 10.5 LCD display fab in Guangzhou, which is owned by Sharp (6753.JP) and Foxconn’s (2354.TT) Chairman Terry Gou.    While Sharp has a Gen 10.5 LCD fab I Japan, the China Gen 10.5 fab had been delayed during the early stages of COBID-19, and given Corning’s careful expansion plans, Sharp has likely given the ok for the fabs phase 2 build out, which was originally scheduled for earlier this year, before the COVID-19 delay, which would double the fab’s capacity to 90,000 sheets/month and make it worthwhile for Corning to build a plant nearby.
Corning has also agreed to a strategic cooperation framework with Shenzhen based Tianma (000050.CH) to develop applications that encompass Corning’s ColdForm technology, which allows for Gorilla Glass to be processed (ion exchange, etc.) and then bent and formed without the use of what would typically be a hot molding process done before processing.  While allowing for the same automotive design shaping that hot molding allows, all of the process steps can be completed before forming, making processing considerably easier and less expensive.  Additionally both companies will conduct joint research toward the development of new products in automotive and the CE space.
 

​In our 9/17/21 note, we indicated that Rainbow (600707.CH), aka Caihong Display Devices, aka IRICO had announced that the board has approved the construction of a large Gen 8.5+ LCD glass production facility in Xianyang.  The project, which is to cost $1.41b US will consist of 8 hot lines and 4 cold lines, ~4 times the size of the company’s existing two Gen 8.5 glass lines in Hefei.  At the time financing for the project had not been reached and caveats that the project might be delayed if full funding is not completed.  It seems that while financing has not been confirmed, the company has decided to begin construction on the new project, which is to complement the company’s existing Gen 8.5 substrate line.
Rainbow indicated that based on the feasibility study and the stable operation of the existing G8.5 glass line, the project would begin construction.  The first line was said to have operated at 100% capacity in 3Q and the cost structure was better than planned, achieving profitability in 3Q.   The given timeframe for the construction is 36 months, so the earliest completion date would be 4Q 2024.  As a new site, we believe the company will build the shell and necessary infrastructure for the facility and then add kilns and processing lines individually based on profitability prospects at the time. 
As we noted previously, while Chinese glass producers are expanding capacity, they are not competing directly with Corning (GLW), Asahi (5201.JP), and NEG (5214.JP), who are supplying Gen 10.5 glass to China’s ultra-large panel fabs.  While there is certainly a market for Gen 8.5 substrate glass in China (China hold >58% of Gen 8.5 LCD production capacity), much of the growth in the industry has been related to ultra-large TV panel production.  China controls over 70% of that capacity but has been unable to supply quality substrate glass to its own producers, a sore spot with the Chinese government.  While Rainbow is moving to expand its Gen 8.5 capacity to help its LCD producer’s source locally, they have yet to build out Gen 10.5 capacity.

​Corning (GLW) reported 3Q results a bit under expectations and guided to a weaker than consensus 4Q.  While sales were at an all-time high, it was almost impossible for Corning not to have been affected by both inflationary and demand issues.  While we will go into more detail tomorrow, both the display and specialty materials (Gorilla Glass, etc.) saw strength despite weakening demand, and glass prices increased a bit in the quarter, but despite some positive design news for Gorilla Glass in the automotive segment, weak auto sales due to semiconductor shortages offset the display growth.  Specialty materials itself was strong, despite relatively weak smartphone shipments across the industry, but management indicated that the build-out of new products could pressure margins a bit going forward.
Inflation was a big topic in Q&A and Corning management admitted that what they thought a few months back was a short-term bout of inflation now seems to be something longer-term in nature, with the company taking steps to negotiate new pricing with customers in those areas that have seen the most cost increases.  The display glass market, which has been quite tight during the last year and saw price increases last quarter, something rarely seen, seems to be a bit less so, as the company is implementing glass melter shut-downs and relining whenever possible, something that was past due but would have meant being unable to meet customer production goals in the past.  With lower large panel utilization levels from customers, GLW will have the opportunity to rebuild some of that older and less cost effective capacity, but the fact that they are able to consider that process indicates a lower level of overall demand.
While Corning performed well in 3Q and remains in the best spot possible in the display space, the ultra-large (Gen 10.5) glass market, they are not immune to the overall economic pressures that have been affecting other CE suppliers.  They remain optimistic about their ability to grow, but seem also to acknowledge that things are evolving differently than they might have predicted earlier in the year.  Typical growth generators in the company’s display business, particularly panel size growth will continue, but the generous pricing environment that was the case for much of last year and this year, is now being eroded by rising costs.  Because the display glass market is one with few players and high upfront costs, Corning is better situated than any other glass producer, but a sustained downturn in the display space and a continuation of cost increases will make generating growth a bigger chore than it has been in recent quarters.

​Samsung Display (pvt), the producer of displays for parent Samsung Electronics’ (005930.KS) foldable products, has been receiving UTG (Ultra thin glass) from Germany’s Schott (pvt), with the material being further processed by a small Korean company, Dowoo Insys (pvt) in which it has a 50%+ stake.  That material replaced a CPI (colorless Polyimide) film supplied by Sumitomo Chemical (4005.JP) used on the first Galaxy Fold which was found to be too easily scratched.  It seems that Samsung Electronics has decided to switch suppliers again, this time developing the FTG (Foldable Thin Glass) at its own manufacturing development center, along with Corning (GLW), a major supplier of display glass to Samsung.
While unconfirmed by the company, it is said that Samsung Electronics used its FTG for the first time as a cover glass for the Galaxy Z Flip 3, with Corning supplying the base material and a well-known Korean glass processor, Econy (pvt) doing the thinning.  The glass is then shipped to a plant in Vietnam where it is cut, coated, and placed on the Fold 3 and potentially other products.  While no word on whether the cover glass for the Galaxy Fold 3 was FTG or the same Schott product used previously, we would expect that Samsung will continue to build out its own internal UTG supply chain for subsequent products.  Given the competitive nature of the smartphone space, Samsung has little choice but to find every possible point at which it can reduce costs, and if it means bypassing a subsidiary, so be it.
CPI producers are hoping that they will be able to gain some traction as rollable devices are developed, as the more extreme cover material curvature in rollables might prove difficult for UTG but also acknowledge that Samsung’s development could have an impact on CPI volumes.  They do note that yields on for UTGs are far lower than for a mature product like CPI, and that if dropped, any glass is prone to breakage.

​Rainbow (600707.CH), aka Caihong Display Devices, aka Irico[1], has announced that its board has approved the construction of a large Gen 8.5+ LCD glass production facility in Xianyang.  The project, which is to cost $1.41b US will consist of 8 hot lines and 4 cold lines, ~4 times the size of the company’s existing two Gen 8.5 glass lines in Hefei.  While the company is financing the entire project itself (including outside funding), the announcement gave considerable warning that full project funding has not been reached and might not be available when the project is to move into full scale construction, leading to possible delays.  The given timeframe for the construction is 36 months, so the earliest completion date would be 4Q 2024.  As a new site, we believe the company will build the shell and necessary infrastructure for the facility and then add kilns and processing lines individually, which would slow the in-country share gains that are the goal of the investment.
Rainbow competes with the three major LCD glass producers, Corning (GLW), Asahi (5201.JP), and NEG (5214.JP) and a few small local producers, but is still dealing with improving the quality of its large format glass substrate products and remains a small supplier of Gen 10 LCD glass, especially when compared to Corning, who has a co-located glass plant next to BOE’s (200725.CH) Gen 10.5 glass plant in Hefei.  We believe that most of China’s demand for large (Gen 7+) glass is supplied by non-Chinese suppliers, while local producers have a higher share of Gen 6 and smaller glass sizes on the Mainland. 
This has been a sticking point for both the Chinese government and the Chinese display industry, who has been under pressure to develop local glass production, but as has been the case with a number of other display technologies, just throwing money at a technology does not mean success is guaranteed.  Quality and guaranteed supply are of greatest importance to panel producers when it comes to substrates, as unspotted defects can cause major problems further down the production line and can cause major yield issues, an ongoing problem for Chinese panel producers.  This seems to be the type of project that should have been instituted two or three years ago, as the Chinese large panel LCD industry was developing, but we note that China has made a few attempts to ‘dominate’ the local glass market in the past, none of which proved successful, so it might have taken a bit longer to convince the CEC that such a large project might work, and even then we won’t know until late in 2024.


[1] IRICO (Rainbow,etc.) is owned by IRICO Group, which is owned by China Electronics Corp, the state-run entity that manages Chinas electronics industry.

​The display glass business is an unusual one, with a small number of suppliers providing the bulk of the substrate material for major panel producers.  Corning (GLW) is the leading supplier, competing with Asahi (5201.JP) and NEG (5214.JP), while a number of smaller suppliers such as Schott (pvt), IRICO (600707.CH), Avanstrate (pvt), and Dongxu (000413.CH), fill in more specialized products.  Panel suppliers have established long=term relationships with primary display glass providers, with a number of glass production sites co-located with display panel fabs.  Corning has well-known relationships with Samsung Display, BOE (200725.CH) and a number of other producers, but the primary display glass supplier to LG Display (LPL), has been Paju Electric Glass (pvt), a joint venture between LG Display and NEG.
While we expect Corning has always supplied some glass product to LG Display, the NEG relationship has been a long one and gives LG Display a mechanism for matching new product production timelines to glass substrate production.  But as the display industry becomes more segmented and specialized, alternative suppliers have a chance at entering the display supply chain for major producers, and while they rarely are able to meet the volumes that top panel producers need for more generic products, they are certainly able to provide product for those more specialized display products. 
In LG Display’s case, they have been using two smaller display glass suppliers for their automotive displays, China’s Tunghsu Optoelectronics aka DongXu, and local firm, Tovis (051360.KS) and while we expect the automotive display business is a relatively small one compared to the TV, IT, and mobile display businesses, it carries high margins and is therefore a focus for panel producers who are always working against declining panel prices and tight margins.   According to Korean press, it seems that Corning has been able to insert itself into the LG Display automotive display supply chain and capture ~10% of the automotive display substrate business from the existing suppliers by offering pricing below that of the two smaller competitors.
This is significant in that it gives Corning another possible entry point toward establishing a larger relationship with LG Display, and while it is a small step, if LG Display grows its automotive display business, Corning has a backdoor to gaining some ground at LGD.  We don’t think this ‘incursion’ will lead to a change in LGD’s primary relationship with NEG, but it seems that Corning’s impact is being felt by Dongxu and Tovis, with the later already seeing a drop in sales to LGD’s parent LG Electronics (066570.KS) as they have recently shuttered their mobile phone division.  With Corning’s array of glass products it is hard to imagine that once the door is opened, they won’t push further in.

​While Corning is making some headway at LG Display, the battle between Corning and Schott for Samsung Display’s new foldables seems to be going Schott’s way.  Schott has been the incumbent in Samsung’s previous foldables but was facing significant competition in the UTG (ultra-thin glass) space from Corning, along-time supplier to SDC.  The new version of Samsung’s Galaxy Fold series (see above) has been developed to use the S-pen writing stylus, formerly used on Samsung’s Galaxy Note line.  As the stylus touch system adds a bit of thickness to the device, it seems that SDC has chosen Schott’s 30um UTG over Samsung’s 50um UTG for the new devices to compensate for the added thickness.  Corning’s UTG would have had to be thinned, post production, to bring it to the same size.
While this means that Schott will supply the majority of the glass for these two new devices, there is still the question of cover glass, which in the case of the Fold 3, must also be able to protect the display from stylus pressure.  While we do not know yet know who the folded cover glass provider is or whether a plastic cover has been used, we know that Corning’s Victus (Gorilla Glass) is being used for the back of the Fold 3 and the Flip 3.  More to come.

​Corning (GLW) reported 2Q results that were slightly ahead of consensus ($3.4b) at $3.5b in sales, up 6.4% q/q and up 36.7% y/y, with EPS (core) of $0.53, against consensus of $0.52.  Display sales grew 8.7% q/q and 24.6% y/y against an easy compare, while Net Income grew 16.4% q/q and 63.2% y/y, the best results since 2014, and margins grew from 24.7% last quarter to 26.4% in 2Q, against 20.2% in 2Q last year.  Specialty Materials grew sales by 7.1% q/q and 15.8% y/y, however Net Income declined by 11.0% q/q and 10.0% y/y, and margins declined from 20.2% last quarter to 16.8% in 2Q, against 21.6% in 2Q last year.  New product spending for the Specialty Materials division was given as the culprit for the lower margins, with no specific timetable for when that would be alleviated.
Guidance was tepid, at 3Q sales of $3.5 - $3.7b, against $3.55 consensus (GAAP), while EPS guidance was $0.54 to $0.59, against consensus of $0.57 - $0.58., with a bit of caution concerning inflation at various points in the company as a gating factor for margins, which saw a 150bps drag from such concerns in 2Q and are expected to see the same in 3Q.  While Corning has taken steps to alleviate those supply chain issues that were recognized in 2Q, they expect other potential issues in 3Q and expect that same 150 bps drag on margins again in 3Q.
While management cited the continuation of the company’s long-term goals, their near-term view in the display space, which includes specialty materials in our view, was a bit less straight forward.  The company raised glass pricing in 2Q and will do so again in 3Q to cover material cost inflation, but was unable to point to glass pricing in the shorter-term.  Glass pricing has been extremely favorable to Corning for the last few quarters, especially in 2021, but it seemed that they were more cautious on how glass pricing would play out for the remainder of the year and 2022.  We expect this is a function of the uncertainty over TV panel prices that we have mentioned previously, coupled with shortages that have plagued the CE space. 
With ~70% of the glass market based on TV panel surface area, Corning relies on average panel size increases to grow the glass market in display, but has had the added bonus of stable or increasing glass prices in recent quarters.  If panel prices flatten or decline, it could put some pressure on glass pricing, although the glass market has few participants and high capital costs, which insulates glass suppliers from panel price volatility more than most in the display supply chain.  All in, we believe Corning was being cautiously optimistic concerning the remainder of the year, at least in the display space, which we believe is the right approach.  If we were directly in the display supply chain, we would want to be the low-cost producer in a market served by few suppliers, no matter what the circumstances with panel pricing.  That’s where Corning is.

​Corning (GLW) announced this morning that it will be instituting a moderate price increase for display glass substrates in the 3rd quarter.  According to the release, “the adjustment to price is a result of elevated costs in logistics, energy, raw materials, and other operational expenses during this extended period of glass shortage, as well as general inflationary pressures impacting the display industry.”  The company also mentioned that it expects glass supply to remain short to tight in upcoming quarters.  Typical ingredients for borosilicate glass are Silica (SiO2), Boric Oxide (B2O3), Soda Ash (NaCO3), and Alumina (Al2O3) and are combined at higher temperatures than typical soda-lime glass, raising the cost.  While pricing on the various components is difficult due to quality and gradation, the cost of electricity produced from natural gas has risen from $2.23 last March to $3.41 in March of this year, a 52.9% increase, and while that does not reflect actual cost to Corning’s display glass production business, it is certainly a factor that would push Corning to incorporate those types of cost increases in its pricing negotiations with customers.
While we cannot remember a time when Corning was able to raise glass prices, it might have happened, however typically, glass prices decline each quarter, although over the last few quarters Corning has been able to hold those declines to small amounts or no change.  Given that supply problems at competitive suppliers and continued demand for displays has kept the glass market tight, it is no surprise that Corning has established price increases for 3Q, when demand will likely be the highest.  As no data was given on the magnitude of the increases, we surmise that Corning Is able to cover the cost increases that it has absorbed over the last few months and likely a bit more.  However,  while the display division’s objective is to increase profits, expanding the company’s customer penetration is key to the longer-term goal of generating returns on the capacity investments Corning has made for its customers, and holding them for ransom with egregious price increases is likely not Corning’s goal in this case.